$4 Gas Forecast

NEW YORK -- Gasoline prices may rise above $4 a gallon next summer as refineries along the U.S. East Coast close, reducing fuel supply, Edward Morse, head of commodities research at Citigroup Global Markets Inc., New York, told Bloomberg.

Sunoco Inc. and ConocoPhillips have idled two plants and plan to shut a third that together can process more than 700,000 barrels a day of oil, or about 46% of the region's refining capacity. That will increase the dependence on imports to meet fuel demand in the region that includes the delivery point for New York Mercantile Exchange (NYMEX) futures contracts, the basis for national prices at the pump.

Cargoes arriving from abroad accounted for 19% of demand in the East Coast in September, Energy Department data show. Shipments from the Gulf Coast and Midwest met another 51% of consumption, with local refineries supplying the rest.

"We have a real supply problem ahead this summer because these refineries have not made money and they are shutting down," Morse told the news agency. "Summer gasoline is harder to make than winter gasoline, and we could see $4 as a floor price rather than a ceiling limiting demand."

"The area could be left vulnerable to price spikes if there are ever any unplanned outages or supply disruptions," Tom Bentz, director with BNP Paribas Prime Brokerage Inc., New York, told Bloomberg.

The shuttered refineries, which processed mostly imported crude from Europe and West Africa, faced higher prices than their counterparts in the U.S. Midwest and Gulf Coast able to use less-expensive domestic oil.

The East Coast imported 596,000 barrels a day of gasoline in September out of 3.1 million barrels supplied daily, Energy Department data show. That's poised to rise as suppliers seek to replace local production.

"The tanker market had already anticipated the prospect of an increase of gasoline to New York harbor," George Los, an analyst at Charles R. Weber Co., a Greenwich, Connecticut- based shipbroker, told the news agency. "With the acceleration of Sunoco's plans for the Marcus Hook idling by some eight months this is likely to boost demand, mostly for medium-range tankers."

Prices may also rise in New York versus the Gulf Coast in order to attract more shipments from the Gulf, where about half of U.S. refining capacity is located. Reformulated 87-octane gasoline in New York was 8.38 cents a gallon above the Gulf yesterday, according to data compiled by Bloomberg, up from 4.53 cents November 30.

Colonial Pipeline Co., the largest pipeline linking the U.S. Gulf Coast with Northeast markets, delivers 2.35 million barrels a day of oil products from Houston to Greensboro, N.C. The main lines from North Carolina deliver about 1.4 million barrels a day to Linden, N.J.

"I would assume the Colonial line space just got a lot more valuable," Andy Milton, vice president of supply at Gainesville, Ga.-based Mansfield Oil Co., which supplies more than 2 billion gallons of fuel per year, told Bloomberg.

Colonial announced December 21 that it plans to increase capacity on its main gasoline pipeline by 100,000 barrels a day by the first quarter of 2013.

"We foresee some significant tightness" ahead for Nymex gasoline, analysts at Barclays including Miswin Mahesh in London said in a December 6 report cited by the news agency. The analysts suggested buying the gasoline contract for August delivery and selling heating oil for the same month, according to the note.

Gasoline's discount to heating oil narrowed to 25.03 cents from 45.37 cents November 30. The spread reached 62.69 cents a gallon on November 14, after diesel and heating oil inventories in the U.S. dropped to the lowest level since December 2008.

"Now is the time to look at selling heating oil and buying gasoline for the summer," Citigroup analysts led by Seth Kleinman said in a December 6 report cited by Bloomberg. "The outlook for gasoline is challenging, but summer values for the spread are already extremely cheap."

Thursday, December 29, 2011

With gas prices soaring, many people in North Carolina are wondering how high prices will effect their pocketbooks long-term, but experts are saying there's no telling how high prices will go or when the price climb will end.

RALEIGH, N.C. — As expected, North Carolina's gasoline tax is going up by almost 4 cents a gallon in January.
Revenue Secretary David Hoyle announced Tuesday the state motor fuels tax would grow by 3.9 cents per gallon to a record 38.9 cents starting Jan 1. State law directs the tax be recalculated automatically twice a year based on a formula linked to wholesale gas prices. The tax rose by 2.5 cents per gallon in July.
The upcoming tax increase falls in line with estimates made by the Legislature's nonpartisan fiscal staff.
The North Carolina House voted last month to cap the tax at 35 cents for six months, but the Senate declined to take up the bill, saying it wasn't the right time to consider the change.

North Carolina's gasoline prices have dropped 64 cents a gallon since peaking May 6. It is an early Christmas present for the 2.4 million motorists in the state expected to drive more than 50 miles this holiday season, according to AAA Carolinas.

Fueling OutletsThere were 159,006 total retail fueling sites in the United States in 2010.

A total of 117,297 convenience stores sell motor fuels in the United States. This represents 80 percent of the 146,341 convenience stores in the country.

Overall, 58 percent (67,504 stores) of the country’s 117,297 convenience stores selling fuels are one-store operations. By contrast, about 1 percent are owned and operated by the integrated oil companies, of which only two (ChevronTexaco and Shell) still are committed to selling fuel at the retail level.

When gas prices increase, many gasoline retailers report an increase in gasoline theft, or "drive-offs."

The Million Dollar ProblemGasoline price volatility traditionally leads to a significant increase in gasoline theft, brought on by misdirected consumer anger at higher prices. However, more retailers now require prepay to stop the problem that had gotten out of control.

In 2009, gasoline theft cost the U.S. convenience store industry $89 million, a steady decline from the record $300 million reported in 2005. Gas theft cost the industry $109 million in 2008 and $134 million in 2007. The average loss per store in 2009 was $761, and that figure is conservative, since it only includes reported thefts and is based on all convenience stores that sell gasoline, including those in states that mandate full-serve (New Jersey and Oregon) and stores in areas where prepay in the norm. Gasoline theft has declined since September 2005 (post-Hurricane Katrina when gasoline rapidly increased and topped $3 per gallon) when more stations began mandating prepay for fuel.

Nationwide, in 2007, gasoline theft cost the industry $134 million, a sharp decline from the $300 million reported in 2005 and the $237 million reported in 2004. (Theft totalled $122 million in 2006.) The average loss per store was slightly more than $1,000, and that figure is conservative, since it is based on all convenience stores that sell gasoline, including those in states that mandate full-serve (New Jersey and Oregon) and stores in areas where prepay in the norm, such as California and many major metropolitan areas including New York, Las Vegas, Chicago and Atlanta. There is no way to determine what the loss was at stores that do not require prepay, but the figure is likely double that or more.

The problem of gasoline theft would have been even greater since September 2005 if so many retailers hadn't begun to mandate prepay in after Hurricane Katrina when gasoline prices reached record levels of $3.06 per gallon, and when gasoline prices again topped $3 per gallon in every year since then.

With convenience stores reporting total motor fuels sales of $408.9 billion in 2007, that means that, on average, one in every 3,300 fill-ups was gasoline theft. While this is not a "conga line" of theft, at two cents per gallon profit (at best), a retailer would need to sell an extra 3,000 gallons to offset each $60 stolen.

Gasoline theft tends to be a problem in densely populated metropolitan areas and near interstates where there's a greater anonymity; in these areas, retailers have reported losses as much as $1,500 per store per month. At stores in communities, where everyone tends to know each other, the problem generally is not as significant.

Gasoline theft is not a "Robin Hood" crime of robbing the rich -- retailers typically make pennies a gallon on the sale of gasoline. In fact, they can often make as much, or more, from the sale of a 12 oz. cup of coffee than a 12 gallon fill-up.

The increase in gasoline theft is directly related to price increases, as opposed to high prices. Theft generally increases every time prices increase.

Gasoline Thief Profile EvolutionTypically, convenience stores can experience a few gasoline thefts a week; however, when prices increase, some stores see several gas thefts a day. With retailers making a penny or two profit on the sale of gasoline, a retailer needs to sell thousands of additional gallons of gasoline just to make up for the loss. Oftentimes, it only takes one $50 theft a day to significantly erode -- or wipe out -- a retailer's daily gasoline profits.

Gasoline theft has always been an issue for the industry, and was often teenagers taking a few dollars of gasoline for a thrill. Today, the problem of theft is across all demographics, and the cars involved with the crime are everything from "junkers" to late-model SUVs.

Just as the frequency of gasoline theft increases, so does the size of the fill-up stolen. And with higher prices, the amount lost from just one gasoline theft can easily top $100 when an SUV in involved.

A disturbing trend over the past few years is the emergence of gasoline theft rings, in which specially designed trucks are used to siphon fuel from stations' underground storage tanks. Members of a theft ring operating in Florida were arrested in June 2005 for using trucks that could siphon upwards of 1,000 gallons of fuel undetected. Also in June 2005, a man in Cottondale, AL, was severely burned in an explosion while allegedly trying to siphon hundreds of gallons of fuel from a station.

Mitigationg Theft Comes at a CostRequiring customers to prepay for their fuel would virtually eliminate the problem of gasoline theft. However, consumers, wanting convenience, will usually choose to go to another retailer that does not require prepay if one is close. Even so, the problem of gasoline theft in 2006 led to a record number of retailers mandating that customers prepay for their fuel.

The town of Mt. Pleasant, SC (a suburb of Charleston), enacted an ordinance in early 2004 that mandates that all retailers require prepay. Similar laws have since been enacted in Twin Falls, ID (late 2004), Myrtle Beach, SC (July 2005), Bowling Green, KY (January 2006), Kansas City, MO (July 2006) and Flower Mound, TX (Oct. 2006). These are believed to be the only laws of their kind in the United States, although in some areas of the country prepay is the norm, especially California. Other areas of the country have looked at mandating prepay, including Conway, AR; Fayetteville, NC; Topeka, KS and Milwaukee. In February 2008, British Columbia became the first – and only – Canadian province to enact such restrictions.

Besides the risk of losing customers, retailers usually elect to require prepay as a last resort, since generally customers will underestimate their gasoline purchases because they don't want to have to go back in the store for change. Also, they tend to shop less inside the store, where margins are healthier, because they have already been inside the store once to prepay and find going back inside to be inconvenient. There also are concerns that mandating prepay could lead to cash customers instead paying by credit card at the pump to avoid the inconvenience of prepay. Since credit card fees are 2.5 to 3 percent, that means that retailers could incur an additional 7 to 9 cents per gallon in fees when gasoline is $3.00 per gallon.

Usually, retailers will look at requiring prepay for certain pumps or certain hours before requiring it all the time at a store.

Gasoline Theft Hurts RetailersRetailers are being hit hard by the higher gasoline prices. During periods of price increases, retailers' wholesale costs rise faster than they can recover them at the pump so profit margins are down significantly. NACS reports that gasoline margins in 2007 were 5.2 percent, the lowest level since 1983, and much of the reason for declining fuel margins is price volatility for gasoline.

Because theft is typically linked to elevated prices, gasoline theft usually hits retailers when the value of that stolen property is at an all-time high.

In addition to reduced profit margins on gasoline, more customers pay for their gasoline by credit card (approximately 60 to 70 percent of gasoline customers in 2007). The processing fees for credit cards (as much as 3 percent) further shrink already reduced margins to the point where retailers often make less per gallon than the credit card company.

Gasoline Theft Negatively Impacts Consumers

Law-abiding customers must pay the cost of the theft in higher prices.

Some drive-offs leave the gas island at unsafe speeds to avoid being caught, creating a more dangerous environment.

An increase in the incidence of gasoline theft makes more retailers consider mandating prepay, which consumers do not prefer to have as their only option. If more areas mandate prepay, it will be one less product available to consumers on the "honor system" where they can obtain a product before they pay for it.

Technology Helps Prevent TheftLow-tech solutions can be effective. Simply greeting all customers -- whether by intercom or in person -- can be effective. This takes away the feeling of anonymity.

Technologies like the patented program developed by Pump-on LLC largely protect the customer's convenience and still ensures that theft is eliminated. With this program, cash customers use their driver's licenses (where basic identification information is read) at the pump to authorize dispensing. As of January 2007, a number of retailers have committed to work to further develop this program, including Sheetz, Wawa, RaceTrac and QuikTrip. In fact, QuikTrip has been using this type of program to great success in a number of cities. If customers fill up and fail to pay, their names are turned over to police. In Tulsa and Kansas City, gasoline theft was "reduced to a trickle," QuikTrip reports.

Some Success Gaining Legislation Passage

Between 1998 and 2005, 27 states passed laws in which a judge has the discretion to suspend the driver's license of someone convicted of gas theft.

In 2005, Oklahoma and Virginia increased the fine for those convicted of gasoline theft. Also in 2005, South Dakota passed a law (which took effect July 1) that makes the owner of the vehicle used by someone who drives off without paying for gas liable for the cost of the gasoline plus a service charge. If the fee isn't paid, a civil fine is assessed.

Gas thieves are getting their driver's licenses suspended. According to the Indiana Bureau of Motor Vehicles, the state recorded 171 license suspensions for gasoline theft in 2002, 366 suspensions in 2003 and 246 suspensions in the first half of 2004.

An important part of Georgia's campaign, developed by the Georgia Association of Convenience Stores and Georgia Oilmen's Association, and many of the other states, included stickers on the gas dispensers that warned customers of the impact of gas theft. A typical message showed a state trooper holding someone's driver's license, accompanied by the message: "Pay for your gas or lose it!"

A provision of the South Dakota gasoline theft law states that if an operator can get a license plate number and description of the vehicle, they can request information in writing to law enforcement, obtain the drivers information and send them a bill in the mail.

Convenience stores sold $385 billion in motor fuels in 2010, nearly triple the $134.2 billion sold just a decade earlier in 1999. In 1989, convenience stores sold $38 billion in motor fuels; in 1979, motor fuels sales at convenience stores were $5.3 billion.

Motor fuels sales accounted for more than two-thirds of the convenience store industry’s sales in 2010 (66.9 percent). However, because of low margins, motor fuels sales contributed less than one-third of total store gross margins dollars (26.4 percent).

Motor fuels gross margins (or the “markup”) averaged 15.8 cents per gallon in 2010. However, after incorporating expenses, such as debit/credit cards fees — which averaged 4.7 cents per gallon across all payment methods — operating expenses, depreciation and taxes, profit margins in 2010 typically were 2 cents to 4 cents per gallon (average breakeven on fuel sales is 12 to 14 cents). Retailer profit margins in 2009 were approximately 1 cent to 3 cents per gallon.

State-Specific FuelingConvenience stores serve as the one-stop shop for food and fuel in states that are dominated by small towns. At least 95 percent of convenience stores sell motor fuels in North Dakota (96 percent), Nebraska (96 percent), Iowa (95 percent) and Kansas (95 percent).

The states with the lowest percentage of stores selling fuel either have full-service fueling mandates (New Jersey and Oregon) or are in the Northeast, where many stores were built before the early 1970s when motor fuels sales at convenience stores began to flourish.

The five states with the lowest percentage of convenience stores that sell motor fuels are New Jersey (44 percent), Massachusetts (53 percent), New York (57 percent), Rhode Island (60 percent) and Oregon (63 percent). Only 40 percent of stores in Washington, D.C., sell motor fuels.

Store AveragesThe average convenience store posted $3.98 million in motor fuels sales and sold 123,449 gallons per month in 2010.

Retailgasoline prices directly reflect wholesale prices. However, how – and when – retailers purchase wholesale gasoline can differ significantly, greatly influencing pricing strategies and profitability. To fully understand how retail gasoline prices are determined, it is important to understand:

The differences in supply arrangements and ownership structures;

The relationship between wholesale costs and retail prices;

The influence of competition for consumers; and,

Regional influences on costs and pricing decisions.

Supply Arrangements and Ownership StructuresRetailers pursue different marketing strategies to gain a competitive advantage, and one key component is the nature of their fuel supply arrangements. Some choose to sell motor fuel under the brand of their supplying refiner, others choose to establish their own brand. Finally, there remain a few sites that are directly owned and operated by the major oil company or the refining company itself, but these are becoming much less common.

Major Integrated Oil CompanyOwned and Operated: Less than 2 percent of the 115,340 convenience stores that sell gasoline in the United States are owned and operated by the major oil companies. These retail locations receive product directly from the corporation’s refinery assets and their profit or loss is integrated into that of the corporation.

Refining Company Owned and Operated. Approximately 2.5 percent of convenience store gasoline retail locations are owned and operated by non-major refining companies. These also product directly from the corporation’s refinery assets and their profit or loss is integrated into that of the corporation.

Branded Independent Retailer: Approximately 44.5 percent are independently owned and operated and sell gasoline under the brand name of the fuel supplier. The business owners sign a supply contract to sell only one brand of fuel at any particular location. Branded retailers pay a slight surcharge per gallon for using the refiner’s brand, benefiting from the supplier’s marketing and ensuring a more secure supply of product. This surcharge can vary from contract to contract for any variety of reasons but in all cases, the refiner supplier establishes the retailer’s wholesale costs. Branded independent retailers benefit, however, when supplies are constrained by securing a higher level of priority for accessing product, although access to supplies may be restricted.

Unbranded Independent Retailer: The remaining 51 percent of convenience gasoline retailers are operated by independent business owners who do not sell gasoline under a brand owned or controlled by a refining company. These retailers purchase gasoline from the unbranded wholesale market, which is made up of gallons not dedicated to fulfill a refiner’s contracts. These retailers do not pay a marketing surcharge like their branded competitors do; consequently, unbranded gasoline is typically sold at all levels of trade for a lower price than branded gasoline. However, when supplies are constrained, these retailers have the lowest level of priority to access gasoline, often incur the largest wholesale price increases and may be completely denied access to product. Their wholesale costs are also established by the refiner supplier(s).

A company’s supply contracts and size determine its options for obtaining gasoline. Branded independent retailers have one option for gasoline: the refiner that provides it with supply. Some larger unbranded independent retailers also may have contracts with a specific refiner, or even multiple refiners. Others may simply purchase product off the open market.

Most retailers are small businesses that obtain their gasoline at a terminal, also known as “the rack.” Prices at the terminal are known as “spot” prices, and these typically experience the most price volatility.

For those purchasing fuel at the rack, there are two options for delivery. Some companies may elect to have gasoline delivered to their stores by a “jobber” who delivers fuel to their store – branded or unbranded – for a delivery fee. Other retailers have invested in their own fleets of trucks that go to a specific terminal – or terminals – to obtain gasoline. These companies may also serve as jobbers to other retailers.

Some larger unbranded retailers may purchase gasoline futures, attempting to lock in specific prices for delivery on a specific date in the future. This type of purchase, commonly referred to as “hedging,” helps these retailers manage their costs in anticipation of volatile wholesale prices.

The Relationship Between Wholesale and Retail PricesWholesale gasoline is a commodity that is traded on the open market. As such, its price can change by the minute, which may influence the cost structure for a retailer. On average, retailers sell approximately 4,000 gallons of fuel each day and receive about three deliveries (approximately 9,000 gallons per delivery) each week. Higher volume retailers may receive multiple deliveries each day depending on their storage capacity. Considering the volatility of wholesale prices, the cost of each delivery can vary significantly even within a short time frame (i.e., a 5-cent-per-gallon increase will cost the retailer an additional $450 per delivery).

The U.S. Energy Information Administration (EIA) published a report in 2003 entitled “Gasoline Price Pass-Through” which details the relationship between wholesale and retail price movements. The report plots the expected movement of retail prices in response to changes in wholesale prices and demonstrates that while it can take as long as 8 to 12 weeks for the wholesale price change to be completely reflected in retail prices, the majority of the change is passed through in the first couple of weeks.

The following chart plots the national average wholesale (not including taxes and freight) and retail price of regular unleaded gasoline week-to-week in 2009 as reported by the Oil Price Information Service (OPIS):

The Influence of CompetitionIf wholesale and retail prices are so directly correlated, why might it take several weeks for changes in the wholesale price to be passed-through to the consumer? This delay, which occurs when prices are increasing and decreasing, is driven by competitive pressures in the marketplace. Although movements in wholesale gasoline prices immediately influence the cost structure of a retail facility, competition for customers will dictate the store’s pricing decisions and consequent profitability.

Consumer research, as reported in the NACS 2009 gas price kit, reveals that price is the most important criteria when consumers select a gasoline retailer. Nearly one-third of consumers will go out of their way to save as little as three cents per gallon. Consequently, retailers must ensure their posted fuel prices are competitive within their market.

In 2008, motor fuel sales accounted for 72.1 percent of total sales in the convenience store industry, but contributed only 37.6 percent of pre-tax profit. Consequently, it is critical that posted fuel prices at worst do not deter in-store customers from visiting a particular retail location, for it is from these customers that convenience retailers generate most of their profits.

Convenience retailers establish a target retail price based on the wholesale costs of the fuel, operating costs associated with selling the fuel, and a desired profit margin. This target retail price is then adjusted in accordance with competitive pressures, as the retailer seeks to set a price on fuel that will maximize customer traffic inside the store and generate the greatest overall profitability for the location.

As wholesale prices change daily, retailers are forced to constantly adjust their target retail price. However, because not every retailer receives deliveries at the same time nor incurs the same change in wholesale prices, competition does not always allow the retailer to immediately or completely adjust for changes in costs. This creates a volatile situation in which retail fuel profitability fluctuates continuously. Consequently, it is important for retailers to evaluate the profitability of their fuel operations over a period of time rather than at any one particular moment.

When wholesale prices are increasing, competition often prevents the retailer from passing the higher costs through to the consumer immediately, resulting in a lower retail markup and reducing the retailer’s profitability. However, once wholesale prices stabilize or begin to decline, competition often enables retailers to maintain retail prices for a while, thereby increasing their markup and recovering the profits lost when wholesale prices were rising. Over time, the average retail markup remains relatively stable.

For example, in 2009, national average retail prices ranged from a weekly low of $1.639 to a weekly high of $2.683, according to OPIS. Meanwhile, the national average retail markup varied from 4.9 cents per gallon to 30.3 cents. Over the course of the year, however, the average retail price was $2.334 and the average retailer markup was 13.1 cents.

Retail profitability, however, is much lower than the retail markup. From this 13.1 cents per gallon, retailers had to pay for equipment, associated operating expenses, and credit card fees (assessed on average at 2 percent of each transaction completed with a credit or debit card). The average breakeven for 2009 is estimated at approximately 11 to 12 cents per gallon. Consequently, the retailer profitability for 2009 was 1 to 2 cents per gallon, at best, on average.

Replacement Costs
Complicating a retailer’s ability to set competitive prices as wholesale prices move is the challenge of maintaining sufficient operating capital to cover the cost of the product that will replace the inventory being sold.

A gasoline retailer typically seeks to establish a retail price based on the cost of replacing the gasoline currently at the retail location – not the cost of that product itself. Basing prices on “replacement costs” is especially critical when wholesale prices fluctuate frequently. A retailer must generate sufficient cash from its current retail sales to purchase its next delivery of gasoline; otherwise, the retailer would be constantly using debt to finance wholesale gasoline purchases.

With pricing influenced by replacement costs, there can be consumer misperceptions when gasoline prices rise, as some consumers observe prices changing at a retail location even though the station did not receive a new shipment of gasoline. However, the store may be responding to a notice from its supplier that explains how much the next shipment will cost. But even these decisions to respond to anticipated changes in wholesale costs are strongly influenced by competitive pressures and, often, a retailer is unable to adjust retail prices to match the change in wholesale costs. When prices retreat, market competition again influences a retailer’s pricing decisions. During these periods, consumer interest in prices wanes and they usually don’t notice that prices dropped even though a new shipment has not arrived.

Regional Influences on Costs and PricesBecause of consumer price sensitivity, retailers know the importance of setting their price to be as competitive as possible in a market area. If their retail price is significantly higher – for whatever the reason – retailers lose not just the gas sale, but any chance of capturing the additional in-store sale.

But, the fact remains that costs can vary in a market area, and that the retailer with the highest retail price may not be making the most money per gallon. Depending on the terms of supply arrangements, operating expenses and other factors, the store with the highest price in a market might actually realize less profit per gallon than the competition. There are usually several factors that could contribute, and some or all of them could be at work in a given area:

Taxes: State taxes can vary wildly in a given metropolitan market area. For example, in January 2010 gasoline taxes in New York state average 63.0 cents per gallon, while in neighboring New Jersey, taxes average 32.9 cents per gallon. A number of municipalities across the country also assess local taxes on fuel, and these could vary by city or county. Competition does not recognize political boundaries, so the impact of varying tax policies on individual retailers can be quite different – a competitor operating in a higher-taxed jurisdiction is at a disadvantage compared to the retailer in a lower taxed area.

Proximity to Product: Distribution costs affect the retail price of gas. In some cases, being a few dozen miles further away from a terminal can have a significant impact on costs. While most metropolitan areas are located near several wholesale terminals, retailers in more rural areas may be forced to drive more than 100 miles to obtain supplies.

Fuel Requirements: Fuel requirements vary by region, state and even county. In general, the more densely populated areas of the country are required to sell a different blend of fuel in the summer months. This fuel costs more to produce, and supply challenges during the spring transaction can create added costs to the process.

Business Costs: Rent is a considerable expense for retailers in some areas. Highly desirable locations cost more to operate. For example, there are less than 50 gas stations on the island of Manhattan because retailers find it difficult to make sufficient income selling gas on costly real estate. Across the country, factors include whether the site is owned or leased, when the property was bought or leased and the terms of this contract. These all can play a role in the costs required to sell fuel.

Market Conditions: Some high-volume retailers may get new deliveries multiple times a day, but even average retailers get new deliveries several times a week. When wholesale prices are fluctuate rapidly, the day – or even the time of day – that fuel is delivered can significantly impact the cost. It is not uncommon for wholesale prices to move 10 cents or more in a given day.

Brand: A branded retailer typically pays a premium for fuel from a branded supplier in exchange for marketing support, supply guarantees, imaging assistance and other benefits, including the value of the brand, which is still important to many customers. However, when supplies are tight, these retailers may see lower wholesale costs. In extreme cases, there is a “market inversion,” where branded retailers are selling fuel for a price less than unbranded retailers can find it on the spot market. Other factors that could impact the branded retailers’ costs are the terms of the contract, and market conditions at the time the contract was signed. Finally, there are situations where the branded supplier offers discounts to retailers in highly competitive areas, and these discounts may not be available to a retailer selling the same brand a short distance away where competition is less severe.

Pricing Strategy: Ultimately, retailers examine how they want to go to market. The vast majority adjust their markup on gas depending upon current market conditions, settling for a lower markup when prices rise in return for the potential to make up for the lost margin when prices fall. A smaller percentage of retailers seek to have consistent, predictable margins throughout the year. When prices are rising, they may have a price higher than the completion; when prices fall, the reverse is true.